Specialized Benefit Resources

Bank-Owned Life Insurance

(BOLI)

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Advantages of Bank-Owned Life Insurance (BOLI)

BOLI is a tax-efficient tool commonly used by banks to informally finance employee retirement and benefit program liabilities. It can help banks deliver on benefit promises made to employees and enable them to provide more competitive benefit programs while containing costs. As an asset on the bank’s balance sheet, BOLI is an efficient asset/liability management tool that can positively impact the bank’s overall financials.

How BOLI works

The bank purchases life insurance on the lives of a group of employees, such as executives and officers that participate in the bank’s benefit plans. Written consent is obtained from all individuals to be insured. The bank pays the premium, owns the cash value of the policies and is the beneficiary of the insurance. When properly designed and funded, BOLI has the potential to generate income from the growth of the policy’s cash value and from tax-free insurance proceeds paid to the bank on the death of an insured. Any cash value growth is tax-deferred, and the death benefit is generally tax-free to the bank, assuming compliance with applicable tax laws.

BOLI offers banks a tax-advantaged solution to manage the growing liability and expense of their benefit plans.

Bank-Owned Life Insurance (BOLI) 3

Types of BOLI products

General Account BOLI Separate Account BOLI Hybrid BOLI

Policy cash values are backed by assets in the general account of the insurance carrier — underscores the importance of selecting a sound carrier

Policy cash value from assets are separately held by the carrier — offers insulation from the claims of creditors and other policyholders in the event of carrier insolvency

Policy cash values are held in a book value separate account by the carrier — offers insulation from the claims of creditors and other policyholders in the event of carrier insolvency

Offers a solution for financing pre- and post-retirement benefit plan liabilities for community, regional and large banks alike

Provides flexibility — a program can be custom designed to meet the specific objectives and risk profile of a given bank

Offers financing solutions for community, regional and large banks combined with a flexible program to meet each bank’s individual risk profile

Fixed interest rate — reset annually based on expected return of assets earmarked by the carrier, less a spread for expenses and capital

Variable yield — based on the return of underlying variable policy assets, less expenses

Fixed interest rate is reset at least quarterly at the beginning of each quarter. Crediting rates are generally reset quarterly at the beginning of each quarter based on the projected book yield of the assets in the portfolio, less a spread for expenses and defaults, any applicable IMR adjustment, capital and the guarantee provided by the general account

Provides the security of a contractually guaranteed minimum interest rate for the life of the policy

Stable value wraps have the potential to smooth earnings volatility

Provides the security of a contractually guaranteed minimum interest rate for the life of the policy

Potential for lower Risk-Based Capital requirements — based on a “look-through” to the underlying assets of the separate account

Potential for lower Risk-Based Capital requirements — based on a “look-through” to the underlying assets of the book value separate account

4 Bank-Owned Life Insurance (BOLI)

New money vs. portfolio creditingTwo approaches commonly used in determining how interest will be credited to general account policies are the “New Money” and “Portfolio” methodologies. In either case, the interest rate cannot be set below the contractually guaranteed minimum interest rate.

New MoneyThis philosophy credits interest based on the rate of specific assets available at the time of purchase. These assets are nominally tracked and will continue to determine the interest rate throughout the life of the plan.

PortfolioThis approach is based on a pooling philosophy. The insurer pools all of its assets or, perhaps, all of its BOLI assets, then determines a rate for all policies regardless of when the policies were purchased.

Investment choicesA critical element to consider when selecting a separate account BOLI product is the breadth and depth of the separate account investment offerings of the insurance carrier. A sound carrier will have an established process for selecting and monitoring investment managers. Products should offer a variety of managers and funding options in multiple asset classes across the risk-return spectrum. Sophisticated alternative investments and strategies such as hedge funds may also be offered.

It is important to keep in mind that “investor control” and separate account asset diversification requirements must be met in order to maintain the favorable tax treatment of a variable life insurance contract. The bank cannot have influence over investment decisions in the separate account and the account must be adequately diversified, as prescribed in § 817(h) of the Internal Revenue Code of 1986, as amended and Treasury Regulation §1.817-5(b).

CostsDepending on the type of BOLI product purchased, costs may include:

• Premium loads (state premium & DAC taxes, commissions)

• Asset-based charges (M&E, commissions)

• Monthly charges (Policy fees, cost of insurance)

• Investment management fees (separate account manager fees)

• Custody & accounting fees (outside managed custody charges)

• Stable value fees

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LiquidityBOLI should be treated as a long-term asset to offset the costs associated with a long-term obligation. If necessary, BOLI policies can be surrendered, subject to the terms of the contract and the terms of the stable value agreement. If a policy is surrendered, there may be income tax consequences if there is gain in the contract on the date of surrender.

Pre-purchase analysisBefore purchasing BOLI, a bank’s board and senior management should understand the risks, rewards and characteristics of BOLI. A valid business purpose must be identified, such as offsetting employee retirement and benefit obligations. Banks may potentially use up to 25% of Tier 1 capital for BOLI (15% with any one carrier for General Account BOLI), less an allowance for loan loss reserves. The Federal bulletin “OCC 2004-56” provides guidance on the analysis banks should undertake when purchasing BOLI. Information can be found at http://www.occ.gov/news-issuances/bulletins/2004/bulletin-2004-56a.pdf.

Our advantageMetLife, Inc. (NYSE: MET), through its subsidiaries and affiliates (“MetLife”), is one of the world’s leading financial services companies, providing insurance, annuities, employee benefits and asset management to help its individual and institutional customers navigate their changing world. Founded in 1868, MetLife has operations in more than 40 countries and holds leading market positions in the United States, Japan, Latin America, Asia, Europe and the Middle East.

MetLife’s Retirement & Income Solutions division (RIS), the company’s institutional retirement business, issues products through Metropolitan Life Insurance Company and Metropolitan Tower Life Insurance Company, two wholly owned subsidiaries of MetLife, Inc.

The RIS team is here to help guide the far-reaching financial decisions that will impact hundreds, even thousands, of lives for years. We know what’s at stake. By partnering with us, you’ll work with skilled associates who develop innovative financial solutions designed to help reduce financial and regulatory risk, so both your company and your plan participants can have a more secure future. Explore our solutions to find the one that best suits your organization’s needs.

The major rating agencies have repeatedly recognized MetLife for our financial strength and our strong capitalization.1 Our financial strength has been built upon and is sustained through our diversity of businesses, conservative risk management and expertise in focusing on investment fundamentals. MetLife specializes in providing clients with the knowledge, tools and solutions to help manage the complex regulatory issues and potential tax implications that are unique to benefits and benefit liabilities.

Metropolitan Life Insurance Company | 200 Park Avenue | New York, NY 101661710 928549B L0520004346[exp0521][All States][DC] © 2020 MetLife Services and Solutions, LLC

1. For current ratings information and a more complete analysis of the financial strength of MetLife, please go to www.MetLife.com and click on “About Us” and then click on “Company Ratings.”

For financial professional use onlyMetLife, its agents, and representatives may not give legal or tax advice. Any discussion of taxes or banking regulations herein or related to this document is for general information purposes only, does not purport to be complete or cover every situation and should not be construed as legal, tax or accounting advice.Variable life insurance is offered by prospectus or private placement memorandum only which is available from your registered representative. The prospectus or private placement memorandum contains information about the product’s features, risks, charges and expenses, and the investment objectives, risks and policies of the underlying portfolios, as well as other information about the underlying funding choices. Consider this information carefully before you invest or send money. Product availability and features may vary by state. All product guarantees are based on the claims-paying ability of the issuing insurance company.Policies issued by one of the following MetLife companies: Metropolitan Life Insurance Company, New York NY 10166; and Metropolitan Tower Life Insurance Company, Lincoln, NE 68516. Products are distributed by MetLife Investors Distribution Company (member FINRA). All are MetLife companies.

For more information about MetLife’s BOLI products and services, please call 1-877-MET-EXEC.